$A lower on dreary domestic data

But soft domestic data led traders to wind back expectations of future interest rate rises by the Reserve Bank of Australia, leading the $A to fall late in the local session and reverse all the day’s gains.

The $A shot up more than US0.5¢ at yesterday’s open to peak at US93.92¢, having closed at US93.3¢ in New York on Friday night.

But weak domestic housing data, comments from an RBA official and investors keen to lock in recent gains prompted the $A to fall below its previous close to be trading at low of US92.85¢ late yesterday.

Signs that higher interest rates are dampening domestic growth were apparent in Australian Bureau of Statistics data that showed housing finance approvals fell a further 1.8 per cent in February. It was the fifth consecutive month of declines as higher interest rates and the reduction in grants for first-home buyers weighed on demand for finance.

Westpac Banking Corporation senior economist Matthew Hassan said: “Finance approvals are telling us that we have seen a cooling off in housing demand, and it does seem to be above and beyond the wind-down of in first-home owners activity.

“The scale of the decline is quite large. We’ve had a 24 per cent cumulative decline in housing finance approvals so far. Ordinarily that would be enough to make the RBA hesitate about policy."

The Reserve Bank of Australia has raised interest rates at five of its six past meetings, but yesterday’s data caused traders to revise down their expectations of another quarter of a percentage point interest rate rise in May to 25 per cent likelihood, from 35 per cent early yesterday.

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Comments from RBA assistant governor, financial,
Guy Debelle
, also dampened expectations. He said the RBA would increase borrowing costs to “something around average levels, which is not far from where we are now".

The cash rate is now 4.25 per cent after the 1.25 percentage points of interest rate rises since October.

But most currencies surged against the US dollar as traders found favour with risk assets following the announcement that finance ministers of the 16 euro members had agreed to commit funds to a Greece bailout should the country require it.

The euro surged to a high of $US1.36, after languishing at the end of last week at around $US1.33. Other European currencies benefited from the news, with the Danish and Norwegian krone, Swedish krona, Swiss franc and British pound all rallying.

The improvement in risk sentiment led investors to sell their safe-haven holdings of the greenback, with the US Dollar Index falling 1 per cent at Monday’s open to sit around 80.3.

NAB Capital chief currency strategist John Kyriakopoulos said traders were relieved to see that Europe had committed hard dollars to Greece and the extent of International Monetary Fund involvement.

“For the moment, the package has provided a circuit breaker for what was rapidly deteriorating sentiment towards the euro," Mr Kyriakopoulos said.

The package will give Greece access to finance over the next three years at a relatively low interest rate should the country require help to refinance maturing debt or be unable to make coupon payments.

The crisis in Greece in recent months has caused the euro to decline sharply against other major currencies. It hit a new record low against the $A last week.

Mr Kyriakopoulos said the latest developments were supportive of the $A over 2010.

“We have been targeting parity for the $A by the middle of 2010 for some time now. What’s happening globally is supportive for that forecast as some of the risks to global recovery are now fading," he said.

Westpac’s Mr Hassan said local traders would be looking to how higher domestic interest rates affect consumer confidence, data which is due out tomorrow.